Thursday, September 12, 2013

Schumpeter's Ghost and Jensen's Modern Industrial Revolution

Joe's recent post on Schumpeter inspired me to revisit a modern version of the same points, this time by the father of modern corporate governance, Michael Jensen.  Read what Michael wrote over two decades ago about 'The Modern Industrial Revolution'.  Keep in mind that this was written at a time of rapid change in business as the hostile takeover wave of the 1980's had shaken managerial complacency.  The degree of rapid change two decades ago seems sloth-like in view of the digital revolution that has encompassed the last two decades.  As we have noted, changes in technology provide one of the catalysts for increased merger activity.   But that increase in merger activity can  be associated with positive or negative shareholder wealth changes.   Joe noted the problem of large bureaucratic firms chasing growth through mis-guided acquisitions in an attempt to recapture growth.  Note the parallels in Jensen's article, and how applicable these arguments are today as they were over twenty years ago.

The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.

The complete article can be downloaded here.

All the best,


BTW, this starts the second full week of an 'international sabbatical tour' that begins in New Zealand and traverses Australia, Thailand and Singapore before concluding in December in Amsterdam for the Acquisition Finance Course with Joe. See the complete description here.  International corporate governance and merger activities share many common, and many disparate themes across nations.  I'll be noting these perspectives, particularly as they relate to merger activity in Europe.  

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